HEALTH CARE STOCKS REGAIN FOOTING AMID FIGHT OVER LAW
Group is secondbest in S& P 500 performance in 2017
Health care stocks are performing better this year than investors might think, given the rancorous debate over the Republican plan to repeal and replace Obamacare.
Overall, the 61 stocks in the Standard & Poor’s 500 health care sector — which include hospitals, insurers, drug makers, biotechs and medical device makers — have gained 8.9% in 2017 versus a 6% rise for the broad stock- market gauge, making it this year’s second- best performing group behind technology, S& P Dow Jones Indices says. At the same time last year, the sector was down 7.1%, compared with a 0.3% gain for the S& P 500.
So what’s injecting adrenaline into the stocks?
Moneymanagers that run health care funds say the group is rebounding from a poor 2016 after being a market leader the five prior years. Since the enactment of the Affordable Care Act in March 2010, health care stocks have risen more than 133%, better than the S& P 500’ s 103% gain. The group ran into trouble last year when the stocks got too pricey. That made them vulnerable to political attacks during the presidential campaign, when Democrat Hillary Clinton called out drug makers for “outrageous and unjustified pricing practices” and Donald Trump made clear he planned to do away with the ACA.
Health care stocks are “playing a
little catch- up,” says Brad Sorensen, managing director at Schwab Center for Financial Research.
But bouncing back from a bad year is only part of the story.
Eddie Yoon, manager of Fidelity Select Health Care fund, says by the end of 2016, the hard- hit sector was again cheap enough to attract buyers, with valuations hitting a low relative to the market not seen since the early 1990s. Investors determined that fears of drug price controls and a lack of clarity regarding the new health reform bill were overblown. Investors believe the Republicanled Congress will be more friendly to the industry than Clinton would have been.
“The market,” says Yoon, “is realizing the pricing environment won’t be as draconian as feared.”
At the end of February, his portfolio was filled with stocks he says have good growth prospects, such as biotech Amgen, up nearly 16% this year; device maker Boston Scientific, up about 13%; and technology solutions names such as Teladoc, up 41%.
“Whatever changes end up occurring, you are still going to have sufficient demand in place where these companies are going to prosper,” says Mark Oelschlager, manager of Live Oak Health Sciences fund.
Changes, Yoon adds, won’t undermine “key pillars of growth.”
Working in health care’s long- term favor, he argues, is its tremendous innovation, which creates a fresh pipeline of new drugs to treat ailments such as high cholesterol. Another growth driver is demographics, as aging populations mean greater demand for medications, more visits to the hospital and a greater reliance on life- saving and life- enhancing surgeries, such as heart bypasses and knee replacements. U. S. health providers also will tap into growth from emerging middle classes around the globe.
The ability of health care companies to increase sales and earnings no matter what the economy is doing also makes them coveted, Oelschlager adds.
Sorensen recently upgraded the health care sector to “outperform,” which reflects a more upbeat outlook. A key reason is the aging of the world’s population, which he dubs an “underlying tailwind. As we get older and fatter we need more health care,” he says. “People demand more drugs and more procedures.”